China’s surplus of $535 billion last year, foreign reserves increased by only 108 billion, where did the money go?

According to official Communist Party data, China recorded a $535 billion trade surplus and capital inflows in 2020, but the Communist Party’s foreign exchange reserves increased by only $108 billion, with a $427 billion difference. The outside world asks, where did the money go?

Hong Kong‘s English-language media, the South China Morning Post, reported on Feb. 3, citing analysts, that the difference between U.S. dollar revenues and foreign exchange reserves reflects money flowing out of China, which also indicates that exporters are keeping their money overseas.

According to the report, foreign balance of payments data on behalf of the bank showed a goods trade surplus of more than 1.4 trillion yuan last year, while the goods trade surplus accounted for by the Communist Party’s customs actually remitted about 1.2 trillion yuan ($185.7 billion), accounting for 32 percent of the 3.7 trillion yuan trade surplus. Some observers believe this means that 68 percent of the tariffed goods trade surplus was not remitted back to China.

Tommy Xie Dongming, an economist at OCBC Bank, said one way foreign exchange flows out of China is that exporters hold dollar earnings either in overseas accounts or as foreign exchange deposits at commercial banks in China, which use the exporters’ foreign exchange deposits to lend overseas.

Meanwhile, onshore foreign exchange deposits at Chinese financial institutions rose to $890 billion by the end of 2020, up $132 billion from $758 billion in 2019.

Tommy Xie Dongming said, “Clients are sticking with the dollar, which means even if there is a trade surplus, they may not sell that surplus to (the central bank) and just keep it as foreign exchange deposits. Commercial banks are absorbing large amounts of dollars so they can use them for overseas loans and investments.”

The latest balance-of-payments data show that China’s current account surplus was 1.18 trillion yuan in the first three quarters of 2020, but 667.6 billion yuan was classified under errors and omissions, suggesting that most of the revenue was lost. Of this amount, 490.3 billion yuan became foreign capital outflows and only 24.9 billion yuan, or 2%, became foreign exchange reserves.

In addition, China’s capital and financial account deficit reached $50.5 billion in the first nine months of 2020, despite growing foreign holdings of Chinese domestic stocks and bonds.